When do investors choose risky options: private vs. public equity? A laboratory experiment.

Outline

• motivation

• research question

• design

• preliminary

different reasons why people do not hold stocks

• risk aversion

• loss aversion

• transactions costs, etc.

do these reasons apply to private equity?

• different information structure

• returns unobservable when out

design

• stock return at time \(t\) is \(x_t\)

• \(x\) follows autoregressive process

• bond yields a payout \(c\)

design - public equity

design - private equity

• \(x\) is still displayed when OUT

predictions

• subjects prefer to explore

• better information leads to participation

predictions

• forecasting rules of \(x_{t+1} = \rho x_t + \epsilon_{t+1}\)

• Landier, Ma and Thesmar wp, 2018
• extrapolative expectations

• sticky expectations \[ F_{t} x_{t+1} = (1-\lambda)\sum^2_{k=0}\lambda^k E_{t-k} x_{t+1}+\gamma \sum^2_{k=0}\lambda^k (x_{t-k}-E_{t-k-1}x_{t-k}) \]

predictions (bayes)

• players observe \(y=x+e\)

• similar to Kalman Filter.

An example (bayes)

results

results

results

results

conclusion

• exploration effects overcome risk and loss aversion.

• financing matters for people participation

work in progress

• rely on forecasting rules

• swithcing in/out is a form of stop-loss orders.

• this is proven to be suboptimal.

• build porftfolios with mixed shares.